Adds new comment, results of 30-year bond auction, updates yields

By Gertrude Chavez-Dreyfuss

NEW YORK, July 9 (Reuters) - U.S. Treasuries firmed on Thursday as investors took advantage of this week's selloff to buy bonds, although gains were capped by caution over renewed attacks involving the United States and Iran.

Treasuries further rallied, pushing their yields lower, after a solid U.S. 30-year bond auction that saw the highest indirect bids, which include those from foreign investors, since October 2024, according to BMO Capital.

In afternoon trading, the benchmark 10-year yield, which moves inversely to prices, slid nearly 3 basis points (bps) to 4.537% US10YT=RR, after hitting a seven-week high on Wednesday. U.S. 30-year bond yields were down 1.1 bps at 5.053% US30YT=RR after also climbing to a seven-week peak the day before.

On the front end of the curve, 2-year notes US2YT=RR, which are sensitive to market expectations for Federal Reserve interest rate moves, fell 3.7 bps to 4.164%. On Wednesday, the 2-year yield touched its highest level in two weeks.

"There's just a little bit of fatigue in the selloff and obviously, we (went) through 4.50% on 10s (10-year notes) and a little bit through 5% on 30s (30-year bonds)," said Zachary Griffiths, head of macro and investment-grade strategy at CreditSights in Charlotte, North Carolina.

"We've been using those levels as guideposts and we thought of those as attractive entry points. With the latest developments in the Middle East and what we're hearing from the Fed, I'd say the balance of risks in the bond market are a little bit more two-sided."

Investors this week have refocused on the Iran war after Iranian armed forces launched attacks on U.S. military infrastructure in Gulf states on Thursday. That followed U.S. strikes on Iran's southern coastal and eastern provinces, putting further strain on a three-week-old ceasefire agreement.

Despite the attacks, U.S. crude futures were down 1.7% at $72.33 per barrel CLc1.

"There's a lot of rate volatility, but we expect rates to come down significantly with oil prices because that has been the driver," said Alonso Munoz, chief investment officer at Hamilton Capital Partners in Atlanta.

He also noted the Trump administration's "willingness to pivot quickly" from the war.

US DATA BACKS ON-HOLD FED?

U.S. data on weekly jobless claims, meanwhile, backed expectations that the Federal Reserve will likely remain on hold for at least the next few meetings, with the labor market stabilizing after jobs sharply decelerated in June.

Initial claims for state unemployment benefits slipped 2,000 to a seasonally adjusted 215,000 for the week ended July 4, the Labor Department said on Thursday. Economists polled by Reuters had forecast 218,000 claims for the latest week.

U.S. housing data also pointed to a Fed that will be in no rush to hike interest rates. Home sales dropped 2.4% last month to a seasonally adjusted annual rate of 4.09 million units. Economists polled by Reuters had forecast home resales would climb to a rate of 4.20 million units.

U.S. rate futures on Thursday as a result priced in just a 26% chance of a rate increase later this month, down from about 31% late on Wednesday, according to the CME Group's FedWatch tool.

"We think the Fed will be on hold and may potentially cut later this year," said Hamilton's Munoz said. "If you look at the data ... we're not seeing a big re-acceleration in inflation, even if our base inflation numbers are anchored a little bit higher than the Fed's 2% inflation target."

Reflecting that confidence in the inflation outlook, the U.S. Treasury sold $22 billion in 30-year bonds to strong demand, following strong outcomes from the sale of 3-year and 10-year notes. The bonds were awarded at a yield of 5.058% , lower than market forecasts, suggesting that investors did not require additional compensation to buy the bond.

Since the last auction in June, 30-year yields are about 5 basis points higher, the bank noted.